The Securities and Exchange Board of India ("SEBI"), vide notification dated April 25, 2024, inter alia amended the SEBI (Alternative Investment Funds) Regulations, 2012, to insert a new sub-regulation (20) in Regulation 20 requiring Alternative Investment Fund ("AIFs"), managers of AIFs ("Managers") and their Key Management Personnel ("KMPs"), to exercise specific due diligence with respect to their investors and investments to prevent facilitation of circumvention of such laws as may be specified by SEBI from time to time.
SEBI has now, vide circular dated October 8, 2024 ("Circular"), issued guidelines on the specific due diligence as mentioned above. Following is a brief overview of the key provisions of the Circular:
Investors availing benefits designated for Qualified Institutional Buyers ("QIBs")/ Qualified Buyers ("QBs") through AIFs:
1. Applicability: For every scheme of AIFs which: (i) has an investor or investors belonging to the same group; and (ii) such investor or investors contribute(s) 50% (fifty percent) or more to the corpus of the scheme.
2. Compliance: Necessary due diligence as per the implementation standards formulated by Standard Setting Forum for AIFs ("SFA") shall be carried out prior to –
availing benefits available to QIBs under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and other regulations formulated by SEBI.
making any investments in security receipts issued by asset reconstruction companies or availing benefits designated for QBs under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
3. Objective: The above compliance has been specified to prevent AIFs from facilitating investors that otherwise may be ineligible for QIB/ QB status on their own, from availing benefits available to QIBs/ QBs.
For the purposes of this Circular, the term 'same group' has been defined to mean 'related parties' and 'relatives' as defined under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
RBI regulated lenders/ entities ever-greening their stressed loans/ assets through AIFs:
1.Applicability: For every scheme of an AIF:
a. whose manager or sponsor is an entity regulated by the Reserve Bank of India ("RBI");
b. that has investors regulated by RBI who: (a) individually or along with investors of the same group contribute(s) 25% (twenty five percent) or more to the corpus of the scheme; or (b) is an associate of the manager/sponsor of the AIF; or (c) by itself, or through its representative(s)/ nominee(s), has majority or veto power in voting over decisions of the investment committee set up by the manager to approve investment decisions of the scheme.
2. Compliance:
Necessary due diligence as per the implementation standards formulated by SFA shall be carried out.
If an investor of the scheme is an AIF, or a fund set up outside India or in International Financial Services Centres (IFSC) in India, then the criteria check for investor(s) regulated by RBI shall be carried out on a look through basis.
The manager shall ensure that the scheme does not make any investment that would lead to the RBI regulated lender/entity acquiring or holding an interest/exposure in the investee company indirectly (that is, through investment in a scheme of an AIF), that they are not permitted to acquire or hold directly.
3. Objective: To address the issue of ever-greening of stressed loans/assets of RBI regulated lenders/entities through AIFs and to prevent circumvention of norms with respect to Income Recognition, Asset Classification, Provisioning and Restructuring of stressed loans/assets specified by RBI for its regulated lenders.
Consequences of failure to satisfy the due diligence checks specified by SFA: Schemes falling under the ambit of the provisions discussed in paragraph A and B hereinabove, shall proceed with proposed investment in accordance with the respective implementation standards as formulated by SFA. If the proposed investment does not satisfy the due diligence checks specified by SFA then:
either such investor or investors of same group as specified above, shall be excluded from the investment, subject to necessary disclosure in the PPM for exclusion of investors; or the investment shall not be made.
Applicability to existing investments held by the schemes as on the date of the Circular: For schemes falling under the ambit of the provisions discussed in paragraph A and B hereinabove, due diligence checks are also required to be carried out for existing investments as per the implementation standards formulated by SFA. Basis the due-diligence checks for such existing investments:
Any existing investment not satisfying the due diligence checks: details of such investment to be reported to the custodian of the AIF, on or before April 7, 2025, in the format specified in Annexure I of the Circular.
All existing investments satisfy the due diligence checks: the manager of the AIF shall submit an undertaking to that effect to the custodian, on or before April 7, 2025.
Custodians shall compile the information reported in sub-paragraph (a) and (b) and furnish the same to SEBI on or before May 7, 2025.
Investment from countries sharing land borders with India through AIFs:
Applicability: For every scheme of AIFs where 50% (fifty percent) or more of the corpus of the scheme is contributed by investors –
a. who are citizens of/are from/are situated in a country which shares land border with India, or
b. whose beneficial owners, as determined in terms of sub-rule (3) of Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, are citizens of/are from/are situated in a country which shares land border with India.
Compliance:
Necessary due diligence as per the implementation standards formulated by SFA, shall be carried out prior to making any investment.
Upon carrying out the necessary due diligence, such schemes shall report details of its investment, which would result in the scheme holding 10% (ten percent) or more of equity/equity-linked securities issued by an investee company (on a fully-diluted basis), to its custodian within 30 (thirty) days of investment, in the format as may be specified by SFA. Custodians shall compile such information received from AIFs on a monthly basis and report to SEBI within 10 (ten) working days from the end of the month.
Such schemes shall also report to their custodians on or before April 07, 2025 in a format specified by SFA, details of their existing investments where the scheme holds 10% (ten percent) or more of equity/ equity-linked securities issued by an investee company (on a fully-diluted basis). The custodians shall compile and share the information with SEBI on or before May 7, 2025.
Objective: To ascertain if investors from countries sharing land border with India are investing in Indian companies through AIFs. As per Rule 6(a) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, an entity of a country, which shares land border with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall invest in equity instruments of an Indian company only with the approval of the Government.
The trustee/ sponsors of AIF, as the case may, is required to ensure that compliance with the provisions of the Circular are included in the 'Compliance Test Report' prepared by the manager in terms of Chapter 15 of Master Circular for AIFs.
Please find a copy of the Circular, here.
This update has been contributed by Aastha (Partner) and Aditi Singh Kashyap (Senior Associate).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
